Highest NAV Funds

My question is regarding few of the ULIPs that are available in the market these days, which are offering the highest NAV of the last 7 years. I want to know if this is right or a stunt used to market.
-Vikram

It is the latter, a nice stunt used to strike a chord with people. Theoretically and legally this is right, but it is wrong in the way these funds are structured. Assuming that there is a mutual fund that gives you the highest NAV in the past 7 years, the way it will do that is by running an asset allocation strategy. If the market goes down after you invest, it will try to invest in fixed income in a way that at least the highest NAV achieved in the past can be achieved during the duration of the fund. So the result of the decline after any modest high has been achieved will be that the fund will turn conservative. This is a disastrous below-average performance, because the design of the fund drives it to be managed in a manner that is extremely conservative. Once it achieves a high and then faces a decline on account of market decline, it will always get into fixed income to ensure that by the time of maturity, the fixed income appreciates to the older level. Hence, it is a compromise on returns.

This article was originally published on January 25, 2012.